Felix Zwart: European VC outperforms American VC
This column was originally written in Dutch. This is an English translation.
By Felix Zwart, Director of Research & Policy at the Dutch Association of Participation Companies (NVP)
Balterton Capital recently announced it has raised $1.3 billion in new funding. The venture capitalist, who invested in neo-bank Revolut, AI start-up Wayve and Royal Match developer Dream Games, among others, has broken a record.
Never before has a European venture capitalist raised so much money in one go to invest in European tech companies. According to managing partner Bernard Liautaud, this reflects the growing interest in European technology.
Better in 10 years and more
What makes this development extra special is that European venture capital funds have outperformed their North American counterparts in terms of returns. Liautaud emphasizes that an increasing list of global tech toppers comes from Europe.
He cites a report by Invest Europe and Cambridge Associates on the returns of European venture capital (VC). European VC funds show impressive results in this regard. Over a ten-year period, the performance, the IRR (internal rate of return), of all funds in euros (20.77%) is slightly higher than that in North America (18.18%) and the rest of the world (19.34%). This is also the case in US dollars.
VC investments take longer to deliver returns than other types of investments. Moreover, VC fund managers tend to cut their losses early and grow their promising companies by reinvesting in them. As a result, looking at time periods of ten years or less doesn't mean much.
However, the IRR is a measure that is very time dependent. A faster return yields a higher IRR. It is therefore advisable to also look at an absolute measure of return. European funds have a TVPI (total value to paid in, or multiple) of 2.06x, which is slightly higher than the 1.98x of North American funds. This concerns funds from the entire data set, from 1986 onwards.
Outdated image
However, this is not the image that most people have of European VC. Usually it was the other way around. Because although some professional European VC funds started in the 1980s, they only really gained momentum in the late 1990s and early 2000s, during the wave of ICT investments and the subsequent stock market crash. The latter in particular has had a long-term negative impact on the returns of the European VC sector. Americans had been investing for at least a decade longer and were therefore able to recover more quickly from the blow. But since then, European VC funds have shown solid performance, comparable to, if not better than, their US counterparts.
More experience = more return
What explains this shift? An important factor is the maturity of European VC fund managers. As they exist longer and their managers gain more experience, performance improves significantly. For example, the TVPI of established European fund managers shows an impressive 2.71x, compared to 1.65x for new European fund managers.
This large difference indicates that a learning process is slow and takes a long time. The sector must therefore continue to invest in talent and innovation to bridge this gap. The lesson for investors is that they should invest in this asset class through the cycle. In doing so, they also help VC fund managers to expand their expertise. And ultimately their returns. Timing the market is not possible with listed investments. Let alone in the dynamic world of startups.
